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Investors Unfollow Twitter – But is the Sell-Off Justified?

On Jan. 6 social media analyst Scott Devitt of Morgan Stanley (MS) tempered the two-month long investment community love affair with Twitter (TWTR) recommending that clients get out of the stock immediately. Devitt both put a price target that was less than half of its current valuation, and gave it an underweight, or “sell” rating. The market responded immediately, sending shares down nearly 7 percent in early trading.

Some kind of correction has been expected ever since Twitter IPOed in November. Since that initial public offering, the social media company has been perhaps the single hottest play in any sector of the market, skyrocketing over 120 percent in less than sixty days. But digging into Devitt’s reasoning behind the downgrade reveals a lot of assumptions about the future of social media, assumptions that are far from certain.

It’s the Ad Revenue, Stupid

Justifying his aggressively bearish position, Devitt made two predictions concerning the future of the company’s ad revenue streams. One, Devitt claimed that Twitter’s share of “socially enabled” online ads, which currently sits at 6 percent of the $10.3 billion market (and will most likely increase overall drastically), would only increase to 10 percent by 2017. Two, Devitt predicted that Twitter would remain a “niche” market, and would fail to grab a wider audience, as rival Facebook Inc. (FB) has done so effectively.

In general, Devitt is bullish on Facebook and bearish on Twitter. While he voiced his skepticism on Twitter he sang the praises of its more established rival, raising his price target on Facebook from $53 a share to $62.

It should be noted that while Twitter has certainly had a momentous rise, Facebook has been no slouch either, doubling in valuation in 2013. Devitt’s bullishness on Twitter has little to do with expected correction, and everything to do with a distrust of Twitter’s ability to grow.

Twitter: “Diverse Revenue Streams” Will Continue to Propel

Perhaps the smartest acquisition Facebook has made in their short history was social media picture sharing app Instagram, which they got for the bargain price of $1 billion. Facebook was wise to branch out as their maiden service wanes with younger audiences, which is key to maintain that effervescent “cool” factor essential to the social media biz.

So Facebook is getting younger via acquisitions, which Devitt recognizes as paramountl to that company’s growth. But what he fails to account for is that Twitter is already well-established with the youth market, and has already positioned themselves as a diverse, multi-faceted social media company before they’ve had to make an acquisition like Instagram at all.

In his original IPO analysis of Twitter, Equities.com’s IPO expert Francis Gaskins was bullish on Twitter, citing these varied revenue streams as a major, untapped area ripe for harvesting ad dollars. This diversity in revenue streams bodes well for Twitter, or their subsidiaries like Vine, being adopted by a broad audience.

Twitter Hasn’t Had to Buy into the Youngs

This lack of mass appeal is perhaps the crux of Devitt’s argument against Twitter and for Facebook. Facebook is “easier to use,” as Devitt put it, much more so than the “complicated” Twitter. But it’s certainly not too complicated for the predominant users of Twitter: the young, the educated, and “mobile.” Twitter users are younger than Facebook’s, they have more disposable income, and they’r eon their phones the most. In short, everything social media advertisers crave. And where that demo leads, other follow.

While Twitter might appear complicated, or to be of less use than Facebook, young, affluent adopters tend to disagree. While Twitter’s $38 billion market cap is certainly inflated, the calls for a crash are a little extreme. With a diverse set of revenue and a solid youthful base, Twitter is poised to grow faster than the doubters are inclined to think.

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